Fiscal policy is the policy of the Government in respect of public revenue, public expenditure and public borrowings.
The major instruments of fiscal policy are:
(a) Public Expenditure
(b) Public Revenue
(c) Public Debt and
(d) Deficit Financing
(a) Public Expenditure: Public expenditure is nothing the expenses of Government incurred to promote economic and social welfare. It plays a vital role in developing countries like India. It has several effects on income, output and employment. Therefore, it is regarded as a very essential instrument in the determination of economic development of a country. In developing countries, the increased public expenditure is always desirable.
According to Wagner’s Law, there is a tendency of increasing public expenditure in respect of the following activities:
- To undertake material production.
- Provision of social services like public health, literacy programmes etc.
- Maintenance of internal and external security law and order.
(b) Public Revenue: Public revenue is the income of the Government from various sources , both tax and non-tax sources of revenue. In order to bring economic stability a suitable taxation policy is always desired.
The various sources of tax revenue are income tax, corporate tax, customs duties, wealth tax, service tax, excise duties etc. Similarly, the non-tax revenue sources are interest on loans, income from public enterprises, fees, fines, penalties, profits of RBI etc. The major uses of tax system as an instrument of fiscal policy are as follows:
- Helps in mobilization of revenue and checking unwanted expenditure.
- Brings favourable changes in redistribution of income and wealth.
- Helpful to control inflation and deflation.
(c) Public Debt: The loan, borrowings made by the Government from public, organizations, institutions is known as public debt. When the expenditure of the Government is more than its revenue, Government will go for public borrowings.
Classification of Public Debt: The public debt can be divided as follows:
(i) Internal debt: It is debt borrowed by the Government from the sources available within the country. It includes internal borrowings; market loans, etc. All treasury bills issued by RBI, State govt.’s, commercial banks, etc. It is also known as loan taken on negotiable securities.
(ii) External debt: It refers to all those borrowings of Government from sources available outside the country. It include loans taken by Government against non-negotiable instruments, non-interest bearing securities which are issued by international institutions like IMF, World Bank, IBRD, ADB, IDA, etc. Loans taken from IMF trust fund is also a part of external debt.
Public Debt as a burden: When the Government borrows more money, the public debt increases and burden of payment of interest falls on the Government. Then the Government has to impose more taxes on the people. When more tax is levied on people, the disposable personal income of consumer’s falls and this will lead to reduction in consumption, savings and also national income at the end. As a result, the growth rate of an economy will be affected. So, public debt is regarded as a burden on the Government and people.
In fact, the internal debt does not create any serious problem in country as the citizens of the country owe the debt to themselves. But external debt is a serious problem. In case of external debt, we borrow from other countries. This will transfer our purchasing power to other countries through payment of interests and reduce the money value of debtor country. So it advisable to reduce market debt:
The following are few suggestions to reduce market loans in India:
- The RBI’s accounts should be integrated with the Government accounts.
- The gold reserves should be auctioned and used to meet Public expenditure.
- Proper utilisation of resources which are generated through disinvestment.
- Utilisation of resources generated from the sale of vast real estate.
(d) Deficit Financing: Deficit financing is one of the instruments of fiscal policy of Government for raising the level of output and employment. It refers to higher expenditure over receipts. It is used to finance economic planning. The major methods adopted by the Government to raise funds for deficit financing are Post Office savings, Provident fund, Public borrowings and printing of new currencies etc.
The deficit financing as an instrument of Fiscal policy leads to an increase in aggregate demand, aggregate investment, production, employment and income. A moderate deficit financing is always desirable in a developing country like India as it contributes to growth of an economy.
